What is a Bull call Spread Strategy and When is it used?

Stock Trading Option Trading
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A Bull Call Spread is one of the simplest 2 leg option strategies that one can implement when the overall outlook of the particular Asset is moderately or slightly Bullish and not extremely Bullish. It involves Buying a call Option and Selling a Call option of the same underlying asset of the same expiry.

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Bull Call Spread Strategy

A bull call spread is a simple multi-leg Option Strategy (by multi-leg, it means that more than 1 option is involved in this strategy), which is used when the overall outlook of the underlying asset (Stock/Index) is moderately bullish.

When to use it-

Bull call spread option strategy can be implemented when the outlook for a particular Stock/Index is moderately bullish and not extremely bullish.

To implement this strategy the following options are to be executed-

1. Buy 1 ATM (At The Money) Call option.

2. Sell 1 OTM (Out of The Money) Call option.

While implementing this strategy the following points should be taken into consideration-

  • Both the Call options should be of the same underlying Asset.
  • Both the options should be of the same expiry.
  • The ratio of the options should be 1:1. This means that if you buy 5 ATM Call options then 5 OTM call options should be sold.

The advantage of using this strategy is-

  1. Minimizing your downsize risk even if your view goes wrong and the price decline is dramatic.
  2. Even if the stock/ Index is slightly bullish and expires near ATM(At The Money) or slightly OTM (Out Of the Money) the profit earned will be maximum.

Some disadvantages of this strategy-

  1. The profit is capped on the upper end. Only a certain amount can be earned if the stock/Index is moving in your anticipated direction.
  2. If the Stock/ Index turns out to be super bullish then there you won’t be able to take advantage of it as this strategy is to be implemented when the outlook of the underlying asset is moderately bullish and not extremely bullish.

Let’s take an example to see how it works-

Let’s assume the overall outlook of TCS will be moderately bullish after its quarterly results hence this strategy can be implemented.
Assuming that the LTP (last Traded price) of TCS is 1500, so to apply this strategy the following options have to executed-

  • Buy 1 1500 (ATM) Call option @ 70.
  • Sell 1 1600 (OTM) Call option @ 30.

In this case, if TCS moves higher then we are going to make money and we will lose money only if it expires below 1540 considering that Rs 40 was the net premium paid for this trade.

  • Hence the break-even point is 1500+40 =1540

  • Maximum profit is- 60 (Difference between the Strike Prices- Total Premium Paid)

  • The maximum loss will be 40 (70-30) that is the total premium paid for this strategy.

Hence to conclude a Bull Call Spread is a very simple and effective strategy that is to be implemented when the overall outlook for the underlying asset is moderately bullish. The maximum potential profit is limited in this strategy and so is the maximum loss which makes this strategy ideal for low-risk traders.